Summit Financial Group Reports 2010 First Quarter Results

MOOREFIELD, W.Va., April 30, 2010 (GLOBE NEWSWIRE) -- Summit Financial Group, Inc. ("Company" or "Summit") (Nasdaq:SMMF) today reported first quarter 2010 net income applicable to common shares of $46,000, or $0.01 per diluted share, compared to 2009 first quarter net income of $1.77 million, or $0.24 per diluted share. Lower 2010 earnings reflect continued pressure from higher levels of nonperforming assets, requiring a larger loan loss provision and increasing levels of credit administration and regulatory expenses.

H. Charles Maddy III, President and Chief Executive Officer of Summit, commented, "We continue to see signs of the long-anticipated recovery in our market areas. There are signs of increasing activity in our northern Virginia real estate markets, primarily in the form of heightened investor interest. However, the volume of new residential construction activity has not yet been sufficient to have had a meaningful impact on property valuations, nor have we seen many deals actually completed.

"Like so many community banks, we have relied extensively on real estate lending to bolster growth and profits -- since this is how we can best serve our local businesses and retail customers. The recent declines in real estate activity and asset quality require that we refocus our strategies, and we have made substantial progress in several critical areas. Over the past year, we have transitioned to slower, or even negative, loan growth, lowered our portfolio risk, increased our reliance on retail deposits, and maintained our regulatory capital ratios in excess of "well-capitalized" levels. Year-over-year, loan growth declined by nearly $80 million, with substantial reductions in construction and development loans outstanding; retail deposits increased by $77 million, allowing us to pay down higher-priced wholesale funding; and lastly, we have been working hard to reduce our controllable expenses to partially offset the higher costs associated with increased levels of problem assets. Our operations continue to gain efficiencies, which should position us favorably in future quarters."

Results from Operations

Total revenue, consisting of net interest income and noninterest income, was $12.7 million for the first quarter of 2010, a decline of 7.5 percent from the $13.8 million generated in the prior-year first quarter. Net interest income was $10.2 million, down 9.7 percent, or $1.1 million, from the 2009 first quarter. A 7.0 percent year-over-year decline in average earning assets, to $1.45 billion for the 2010 first quarter, was the primary factor impacting net interest income, combined with a four basis point contraction in the net interest margin, to 3.00 percent. Compared to the fourth quarter 2009 net interest margin of 2.83 percent, the current quarter improvement was 17 basis points, or 6.0 percent. Mr. Maddy pointed out that Summit's net interest margin has remained relatively stable at three percent over the past year, despite higher levels of nonaccruing loans, and should remain at approximately this same level throughout 2010.

Noninterest income for the first quarter of 2010 on a GAAP basis was $2.52 million compared to $2.44 million for the 2009 first quarter, up 3.2 percent. Excluding nonrecurring items aggregating $235,000 in the first quarter of 2010 and $41,000 for the year-ago quarter, which for both quarters consisted of gains from the sale of securities and other-than-temporary impairment ("OTTI") charges on securities, 2010 noninterest income from operations declined by $118,000, or 4.9 percent, to $2.28 million. The $135,000 decline in insurance premiums from Summit's insurance agency subsidiary was the primary factor contributing to lower noninterest income as employers curtailed benefits spending during the current recession.

The provision for loan losses was $5.35 million for the first quarter of 2010 compared to $4.0 million and $6.83 million, respectively, for the 2009 first and fourth quarters. Summit continues to build reserves to reflect a higher level of nonperforming loans compared to the year-ago level, as well as a higher level of net loan charge-offs: $4.5 million this past quarter compared to $3.67 million for the 2009 fourth quarter and a net recovery of $1.06 million for the year-ago quarter. At March 31, 2010, the loan loss reserve was1.58 percent of total loans compared with 1.47 percent and 1.82 percent at December 31, 2009 and March 31, 2009, respectively.

Noninterest expense for the 2010 first quarter was $7.6 million, down $141,000, or 1.8 percent, from the $7.75 million reported in the year-ago quarter. Costs associated with the problem credit administration, namely, property taxes, insurance, appraisals and collection costs increased to $232,000 for the first three months of 2010 compared to $55,000 during the same period last year, while FDIC premiums were $825,000 in the first quarter of 2010, $442,000 higher compared to the year-ago period. Summit partially offset rising credit and regulatory costs through disciplined control of overhead expenses; salaries and benefits, occupancy, and equipment expense together decreased by $571,000, or 10.5 percent, year over year.

Balance Sheet

As of March 31, 2010, total assets were $1.54 billion, a decline of approximately $48.1 million, or 3.0 percent, from December 31, 2009; over the past twelve months, assets declined by $62.5 million, or 3.9 percent. Total loans, net of unearned interest and fees, were $1.13 billion at March 31, 2010, down $24.0 million, or 2.1 percent, from the $1.15 billion reported at year-end 2009, and $77.7 million, or 6.4 percent lower than the year-ago quarter-end. Commercial real estate ("CRE") loans comprised the largest loan category -- 40 percent of loans outstanding at March 31, 2010, while residential real estate loans contributed an additional 33 percent share. Whereas commercial, CRE and residential real estate loans outstanding all registered relatively modest declines over the past twelve months (down 5.6 percent, 0.7 percent and 2.5 percent, respectively), construction and development ("C&D") loans, currently at $151.3 million, or 13 percent of the 2010 loan portfolio, was the only category to have registered significant declines year-to-date (down $10.8 million or 6.7 percent), and over the past twelve months (down $60.6 million, or 28.6 percent), primarily through a combination of loan charge-offs and foreclosures.

Although total assets declined since year-end 2009 and for the past twelve months, retail deposits remained relatively unchanged since December 31, 2009, and increased substantially over the past twelve months, allowing Summit to reduce the level of wholesale borrowings and long-term debt. Retail deposits were $776.3 million as of March 31, 2010, up $0.7 million or 0.10 percent compared to December 31, 2009, but higher by $77.2 million, or 11.0 percent compared to the year-ago quarter. Savings account balances were still the fastest growth category, but at a lesser rate than in 2009 -- up $9.9 million, or 5.2 percent, from 2009 year-end compared to growth of $104 million, or 110 percent, since the prior-year first quarter.

While retail deposits have been stable since year-end 2009, short-term wholesale funding vehicles declined by a total of $29.3 million: brokered deposits by $7.0 million (down 2.9 percent), to $234.8 million, and short-term FHLB borrowings by $22.3 million (down 44.8 percent), to $27.5 million. In addition, Summit reduced long-term FHLB advances by $20.2 million.

Asset Quality

Nonperforming assets ("NPAs") at March 31, 2010 were $106.4 million, or 6.9 percent of total assets, compared to $107.5 million (6.8 percent of total assets) and $87.4 million (5.5 percent of total assets), respectively, for December 31 and March 31 of 2009. Nonperforming assets decreased by $1.1 million from 2009 year-end, but were higher by $19.0 million, or 21.7 percent, compared to March 31, 2009. C&D and CRE credits continue to account for the majority of problem assets, $57.9 million and $39.0 million, respectively, at March 31, 2010 compared to $50.1 million and $26.7 million for the year-ago quarter.

Nonperforming loans were $55.5 million at March 31, 2010, down $11.4 million from 2009 year-end, with CRE accounting for $33.9 million and C&D loans accounting for $16.7 million. Much of the problem loan improvement can be attributed to the ongoing transition to OREO as Summit has progressed through the workout cycle. First quarter 2010 OREO was $50.6 million, up $10.3 million from the linked-quarter, with CRE properties accounting for $5.1 million and C&D properties for $41.3 million.

Nonperforming residential real estate assets were $8.4 million at March 2010 quarter-end, divided evenly between nonperforming loans and repossessed properties. The commercial loan portfolio has few problem loans – approximately $0.5 million on outstandings of $122 million.

At March 31, 2010, net loan charge-offs were $4.5 million, or 1.57 percent of average loans annualized, compared to $3.7 million (1.25 percent annualized) and a recovery of $1.1 million, respectively, for the 2009 fourth and first quarters. This compares with a provision for loan losses of $5.4 million for the 2010 quarter. As a result, the allowance for loan losses increased by $843,000 this past quarter, to $17.8 million or 1.58 percent of March 31, 2010 loans compared to 1.47 percent at December 31, 2009.

Capital Adequacy

Shareholders' equity at March 31, 2010 was $90.5 million compared to $83.6 million at March 31, 2009. The Bank continues to exceed regulatory standards for a "well capitalized" institution and is in compliance with all regulatory capital requirements, as its Total risk-based capital ratio was 11.90 percent, while its Tier 1 leverage capital ratio was 8.11 percent at March 31, 2010. Total common shares outstanding as of March 31, 2010 were 7,425,472.

In conclusion, Mr. Maddy referred to the groundwork Summit laid in 2009. "The hard lessons learned through this downturn should position us for higher performance in future quarters. Our results should reflect these improvements as the year progresses and the economy returns to a more normal state."

About the Company

Summit Financial Group, Inc., a financial holding company with total assets of $1.6 billion, operates fifteen banking locations through its wholly-owned community bank, Summit Community Bank, headquartered in Moorefield, West Virginia. Summit also operates Summit Insurance Services, LLC headquartered in Moorefield, West Virginia.

The Summit Financial Group, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=2990

FORWARD-LOOKING STATEMENTS

This press release contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Words such as "expects", "anticipates", "believes", "estimates" and other similar expressions or future or conditional verbs such as "will", "should", "would" and "could" are intended to identify such forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Factors that might cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; the impact of technological advances; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. We undertake no obligation to revise these statements following the date of this press release.

NON-GAAP FINANCIAL MEASURES

This press release contains financial information determined by methods other than in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Specifically, Summit adjusted GAAP performance measures to exclude the effects of realized and unrealized securities gains and losses included in its Statements of Income. Management deems these items to be unusual in nature and believes presentations of financial measures excluding the impact of these items provide useful supplemental information that is important for a proper understanding of the operating results of Summit's core business. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

NOTE: (A) – Computed on a tax equivalent basis excluding nonrecurring income and expense items and amortization of intangibles.

NOTE: (A) – Computed on a tax equivalent basis excluding nonrecurring income and expense items and amortization of intangibles.

NOTE: (A) – Assumes conversion of convertible preferred stock